Aflac 2008 Annual Report Download - page 30

26 Aflac Incorporated Annual Report for 2008
Policy Liabilities
The following table provides details of policy liabilities by
segment and in total as of December 31.
Our policy liabilities, which are determined in accordance with
applicable guidelines as defined under GAAP and Actuarial
Standards of Practice, include two primary components: future
policy benefits and unpaid policy claims, which accounted
for 90% and 5% of total policy liabilities as of December 31,
2008, respectively.
Future policy benefits provide for claims that will occur in the
future and are generally calculated as the present value of
future expected benefits to be incurred less the present value
of future expected net benefit premiums. We calculate future
policy benefits based on assumptions of morbidity, mortality,
persistency and interest. These assumptions are generally
established at the time a policy is issued. The assumptions
used in the calculations are closely related to those used in
developing the gross premiums for a policy. As required by
GAAP, we also include a provision for adverse deviation, which
is intended to accommodate adverse fluctuations in actual
experience.
Unpaid policy claims include those claims
that have been incurred and are in the
process of payment as well as an estimate
of those claims that have been incurred
but have not yet been reported to us. We
compute unpaid policy claims on a non-
discounted basis using statistical analyses
of historical claims payments, adjusted for
current trends and changed conditions.
We update the assumptions underlying the
estimate of unpaid policy claims regularly
and incorporate our historical experience
as well as other data that provides information regarding our
outstanding liability.
Our insurance products provide fixed-benefit amounts per
occurrence that are not subject to medical-cost inflation.
Furthermore, our business is widely dispersed in both the
United States and Japan. This geographic dispersion and the
nature of our benefit structure mitigate the risk of a significant
unexpected increase in claims payments due to epidemics and
events of a catastrophic nature. Claims incurred under Aflac’s
policies are generally reported and paid in a relatively short
time frame. The unpaid claims liability is sensitive to morbidity
assumptions, in particular, severity and frequency of claims.
Severity is the ultimate size of a claim, and frequency is the
number of claims incurred. Our claims experience is primarily
related to the demographics of our policyholders.
As a part of our established financial reporting and accounting
practices and controls, we perform actuarial reviews of our
policyholder liabilities on an ongoing basis and reflect the
results of those reviews in our results of operations and
financial condition as required by GAAP.
Our fourth quarter 2007 review indicated that we needed
to strengthen the liability for two closed blocks of business,
primarily due to better-than-expected persistency. In Japan,
we strengthened our future policy benefits liability by $18
million for a closed block of dementia policies. In the United
States, we strengthened our future policy benefits liability
by $8 million for a closed block of small-face-amount life
insurance coverage.
In 2007, our unpaid policy claims liability for prior years
declined by approximately $400 million. More than 70% of
the release of our unpaid policy claims liability resulted from
incurred but not reported claims that are estimated using a
claim cost and completion factor method. During the first
12 months after a claim is incurred, we estimate the ultimate
cost of the claim based on initial expected claim cost factors
that reflect our experience in prior periods. In the 13th month
after incurral, we change the estimating basis to a completion
Deferred Policy Acquisition Cost Ratios
Aflac Japan Aflac U.S.
(In millions) 2008 2007 2006 2008 2007 2006
Deferred policy acquisition costs $ 5,644 $ 4,269 $ 3,857 $ 2,593 $ 2,385 $ 2,168
Annualized premiums in force 12,761 9,860 9,094 4,789 4,510 4,101
Deferred policy acquisition costs
as a percentage of annualized
premiums in force 44.2% 43.3% 42.4% 54.1% 52.9% 52.9%
Policy Liabilities
(In millions) 2008 2007
U.S. segment:
Future policy benefits $ 5,442 $ 4,958
Unpaid policy claims 933 856
Other policy liabilities 375 165
Total U.S. policy liabilities $ 6,750 $ 5,979
Japan segment:
Future policy benefits $ 53,866 $ 40,715
Unpaid policy claims 2,184 1,599
Other policy liabilities 3,416 2,380
Total Japan policy liabilities $ 59,466 $ 44,694
Consolidated:
Future policy benefits $ 59,310 $ 45,675
Unpaid policy claims 3,118 2,455
Other policy liabilities 3,791 2,546
Total consolidated policy liabilities $ 66,219 $ 50,676